British Bank Bailout: Is It Enough?

Britain's Prime Minister Gordon Brown (L) listens as Chancellor Alastair Darling speaks during a news conference at 10 Downing Street, London October 8, 2008. The government will inject up to 50 billion pounds of government money into the country's banks as part of a rescue package to shore up the financial system.

It's all about confidence, stupid. Plummeting markets keep the
economy the primary concern of voters everywhere, but remedies are a tough
sell  especially for governments that have been in power too long to
blame the current mess on their predecessors.

That was one reason so many Americans regarded Hank Paulson's bailout plan with skepticism. And it's why Britain's Prime Minister Gordon Brown and his
Chancellor, Alistair Darling, did not want to dwell Wednesday morning on how
Britain's banking sector had got into such a parlous state that the
government was compelled to spend up to $88 billion in taxpayers' money to secure it. Their emergency rescue plan was hatched over weeks but finalized
in such a hurry that bleary officials labored overnight to finish it before
the skittish markets opened. At a morning press conference, both men
maintained that the problem started with the U.S. sub-prime crisis; Brown
refused to answer questions about how Labour policy over more than 10 years
in office might have contributed to the situation. "This is the time to talk
about the future," he said.

As he spoke, the future for British banking was looking grim. Behemoths such
as HBOS and the Royal Bank of Scotland group had seen their shares fall by
39% and 42% respectively on Tuesday, continuing a trend set at the beginning
of the week as the FTSE 100 racked up its biggest fall in 21 years. Last
month the government was forced to nationalize the mortgage lender Bradford
& Bingley, and earlier this year it took over another debt-ridden bank,
Northern Rock, guaranteeing the deposits of retail customers. Britain's protection scheme for private-sector banks guarantees deposits
only up to $87,500, causing some jittery savers to look on
enviously as some European Union countries announced full protection for all
retail accounts.

A number of Britons began moving their money to these apparently safer
havens, but that's not what triggered the precipitous slide in bank shares
on Oct. 6. Ironically, it was leaking news of the British government's still
unfinished rescue plan that caused mayhem in the markets.
The government is offering to help banks raise up to $88 billion of new
capital, either by buying preference shares in the institutions or
encouraging commercial sources to invest. Together with an extension of the
Bank of England's special liquidity scheme, which will now make $350 billion
available to banks in short-term loans, the package is intended to stabilize
the banking system and foster the sector's recovery. It can be implemented without any new legislation or parliamentary votes.

But the scale of the envisaged capital injections indicated how large the
government anticipates the holes in banks' balance sheets may actually be.
The market is also mulling the impact of the government's stipulation that
banks participating in the scheme must restrict executive pay and dividends
to other shareholders. The voluntary nature of the scheme is also problematic, says a City fund manager based at an Asian-owned bank. "It
would have removed more uncertainty if the government had just applied the
plan to the banks across the board," she says. "Now we have to worry about
which banks might need to participate, which managements will admit this,
and how damaging it will be to admit needing it."

"Remember markets are global," an anxious Treasury official reminded
journalists leaving the building after a briefing as word filtered through that the formal announcement
of the rescue package had failed to immediately restore optimism in the market.
At market close, London's FTSE-100 index had fallen by 5.18%, even though the bailout plan was swiftly followed by coordinated rate cuts in the U.S., Britain and elsewhere. France's CAC 40 closed 6.3% lower on the day, and Germany's DAX lost 5.9%. Certainly, at least some of the downwards momentum was
generated the day before by sinking New York shares and rocky rides in other
stock markets across the globe. Brown believes elements of the plan he has
stewarded for Britain could also be applied in other countries to help to
reduce the turbulence buffeting his own economy.

Maybe so; Brown cuts a convincing figure abroad. But he finds it harder back
home to win over doubters to a plan that could cost British
taxpayers dearly, though he promises they may eventually earn dividends from the investments backed with their own money. Yet the crisis has had a bracing effect. A recent mutiny
against his leadership in Labour ranks evaporated after a bold Cabinet
reshuffle, and rebels shrank back from a coup attempt at such a tense time.
"Who would have dreamed that a financial crisis would have given Labour a
lifeline?" former Home Secretary David Blunkett wondered aloud at a drinks
reception on London's South Bank, as across the river Treasury officials
sweated over the final details of the bank rescue. "Labour is still on the
ropes. It just looks different," he concluded. With confidence levels running so
low even among Labour grandees, it's not going to be easy to restore
confidence in the dealing rooms of the City, or among Britons facing a
wrenching change in fortunes.